limitations of gdp when measuring living standards
One of the main uses of national income data is in measuring the economic well being of the population through the concept of the standard of living. The basic standard for this is to use real GDP per person (per capita).
Real GDP per capita does have some limitations when assessing the standard of living.
Regional Variations in income and spending
National GDP figures hide significant regional variations in output, employment and incomes per head of population.
Within each region there are also areas of relative prosperity contrasting with unemployment black-spots and deep-rooted social and economic deprivation.
See the revision pages on the north south economic divide
Inequalities of income and wealth
GDP figures on their own do not show the distribution of income and the uneven spread of financial wealth. Incomes and earnings may be very unequally distributed among the population and rising national prosperity can still be accompanied by rising relative poverty.
Economic growth and externalities
Rising national output might have been accompanied by an increase in pollution and other negative externalities which have a negative effect on economic welfare. Output figures also tell us little about the quality of goods and services produced
Leisure and working hours
Rising national output might have been achieved at the expense of leisure time if workers are working longer hours
A report released in August 1999, entitled Six Days A Week, claimed that more than a million managers and 656,000 professionals in the UK worked at least 48 hours a week. The study showed that the number of people working more than 48 hours a week has risen from 2.7 million to four million over the past 15 years.
British workers have the longest working week in Europe, with full-time workers putting in an average of 44 hours - three and a half hours longer than the European average
The balance between consumption and investment
We need to analyse the balance between consumption and investment. If an economy devotes too many resources to satisfying the short run needs & wants of consumers, there may be insufficient resources for investment needed for long term economic development.
Faster economic growth might improve living standards today but lead to an over-exploitation of scarce finite economic resources thereby limiting future growth prospects.
The black economy and non-monetised sectors
GDP figures might understate the true living standards because of the existence and growth of the black economy.
The black economy includes economic activity that goes unrecorded by the Inland Revenue and Customs & Excise. The non-monetised sectors of the economy include output that is not sold at market prices but involves barter trade, and self-consumed products.
The Economist's latest estimates for the total value of the black economy throughout the world is $9 trillion. The scale of the underground economy is estimated to average 15% of national output for rich economies and 33% of national output for emerging economies.
According to their survey, Nigeria and Thailand have the world’s largest black economies, both accounting for more than 70% of official GDP.
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